The Nifty 50 is down over 8% year-to-date, dragged by global uncertainty and a spike in crude oil prices amid the ongoing US-Iran standoff. For several retail investors who invest through systematic investment plans (SIPs) — parking a fixed monthly amount in mutual funds — this has translated into negative one-year returns amid the West Asia war.
The natural reaction for many investors with a short-term view has been to stop their SIPs. And this has reflected in the SIP stoppage ratio that spiked to 100% in the month of March. This means that more SIPs were discontinued or matured than new ones started.
The ratio, which has usually ranged 60-70% in recent years, reflects the growing popularity of SIPs, where more investors have opened SIPs than closed. Although, to be sure, the stoppage ratio could also reflect churn in mutual funds where investors move from one fund to another.
But should SIP investors worry about weakness in their SIP returns or just stay the course for the long term?
How returns fared
The Nifty 50 corrected 11.3% in March following the war escalation, and by the end of the month, one-year SIP returns had turned negative across equity categories.
Flexi cap funds — the largest equity mutual fund category — delivered an average one-year SIP return of negative 17.63%. Large cap funds fared little better at negative 17.2%, while the large and mid-cap category returned negative 16.2%. Mid-cap funds lost 14.45% and small-cap funds shed 17.88% over the same period. Multi-cap funds delivered average one-year SIP returns of negative 16.69%
The correction also dragged three-year SIP returns into low single digits across categories. Flexi cap funds delivered an annualised three-year SIP return of just 1.97% on average; large-cap funds, 1.69%; and small-cap funds, 1.59%. The large and mid-cap fund category returned 3.85%, multi-cap 3.46%, and the mid-cap fund category stood at 5.59% three-year annualized SIP returns.
SIP maths explained
Part of what investors are seeing is how SIP maths works. SIP returns are measured using XIRR (extended internal rate of return) — the annualised return that accounts for the timing of each instalment. In the early years of a SIP, the XIRR can look worse because most of the invested capital has had very little time to compound.
Your most recent instalment may have been in the market for weeks; the one before that, for only months. And if equity markets go through a correction in that early window, the XIRR takes a double hit — not enough time to compound, and a falling market.
However, this changes as the portfolio grows. When the accumulated corpus becomes large enough, the money already working in the market begins to do the heavy lifting — and the portfolio becomes less vulnerable to short-term swings. A 10% fall in year nine lands on years of compounding.
The core mechanism of SIP investing — rupee cost averaging — comes into play precisely when markets are falling. “Rupee cost averaging works well when markets are volatile, sideways or in a bearish phase,” said Amol Joshi, founder of Plan Rupee Investment Services.
A fixed monthly investment buys more units when prices are lower, pulling down the average cost per unit. When markets recover, gains are amplified because more units were accumulated at the dip. Consider a ₹5,000 monthly SIP: at a net asset value (NAV) of ₹100, it buys 50 units.
If the NAV falls to ₹80 the next month, the same ₹5,000 buys 62.5 units — 25% more for the same outflow. The investor who pauses during that dip misses those lower-cost units — and when markets bounce, often re-enters at higher NAVs, losing the very advantage the correction offered.
Reading the data
The SIP stoppage ratio climbed to 100% in March — meaning more SIPs were discontinued or matured than new ones were opened. However, experts say this data by itself is not alarming.
"New investors have shown a bit of nervousness and raised questions during this volatile period. But we have guided them to stay put for their long-term goals and stick to their asset allocation framework," said Joshi.
But Dhirendra Kumar, founder of mutual fund tracking platform Value Research, said, “Monthly SIP flows keep climbing, which tells you the underlying habit is intact. The nervousness, where it shows up, is among newer investors who joined assuming the last few years’ returns would simply continue.”
Some of these numbers can also be attributed to direct investors switching from one fund to another in search of better returns.
New SIP account openings also slowing down in March suggests a cohort of investors may be in the wait-and-watch mode. “A few have paused instalments or pulled money out for genuine cash needs. That is a small, expected adjustment, not a break in the SIP story,” Kumar said.
"New investors who started investing looking at past trailing returns may have been disappointed. But such phases also help investors learn the importance of long-term investing — markets go through such periods and it is part of the process," said Swarup Mohanty, chief executive officer of Mirae Asset Investment Managers (India).
Monthly SIP contributions rose 7.5% in March to ₹32,087 crore. This suggests that experienced investors — those who understand that equity markets can go through phases of volatility — held firm, and some may have even increased their allocation during the correction.
The takeaway
Weak one-year or three-year SIP returns are an inevitable feature of investing through a market downturn. Investors in the early years of their SIP should be especially wary of reading too much into SIP returns — the math may be working against them temporarily, but not permanently.
Those invested in funds with sound long-term track records need not panic amid market volatility. Stopping a SIP during a correction means missing the opportunity to accumulate mutual units at cheaper prices. For long-term investors, the right move remains to stay invested, keep the SIP running, and let rupee cost averaging do its job.